Author: Ben Dickey, BSG&L
Covestor models: Pure Growth and Growth Plus Income
Disclosure: Long SDRL, CAT, BTU, CLF, FCX, LINE, EMR
Market overview
The US economy is slowly gaining momentum, but it is still too slow to reduce unemployment. The manufacturing sector is gaining momentum faster than other sectors.
Europe is even slower, due to the overhang of all the sovereign debt. Investors want to know if the PIIGS will ever reform their economies, or are just going to wait for Germany to come to their rescue. So far, one month LIBOR is only 14 basis points above one month Treasuries. This tells me that the central banks of Europe are backstopping the commercial banks.
Developing countries are still growing strong, with India, China and Brazil continuing their full speed ahead growth cycle.
Egypt situation
The key question on investors’ minds right now is what will happen in Egypt. Egypt by itself is not a large consumer or producer of commodities. However, they control the Suez Canal, thru which 17% of the world’s oil and 7% of total world commerce pass. I personally do not think Egypt will allow the canal to close. However, as investors, we need to be watchful.
Oil prices were up sharply late last week. I believe this is based on fear of the unknown and that prices will slowly pull back. I still believe, however, that due to overall world demand, oil prices will hit over $100.00/barrel in the first quarter of 2011.
Even at these elevated prices, we think that the demand for oil will continue and a couple of related investment ideas would be SeaDrill Ltd. (SDRL), the Norwegian deep water driller that has a current dividend rate of over 8%, and Knightsbridge Tankers (VLCCF), which transports oil and currently also has a dividend yield in excess of 8%.
Emerging markets and commodities growth
We believe that the chaos in Egypt will not disrupt world wide growth of emerging markets, which should lead to the consumption of electricity growing 390 giga-watts over the next 10 years. This will require 1.2 billion tons of steam coal per year more than is currently being provided. Global demand for steel is also expected to increase 30% over the same period of time. This 3% annual growth will require 300 million additional tons of metallurgical coal each year, plus huge additional amounts of iron ore.
We are buying stocks that help produce these commodities, like Caterpillar (CAT) and Joy Global (JOYG), which are both deeply involved in mining operations. We’re also buying two commodity trusts: Peabody Energy Corp (BTU), which gains from increased prices shipments of coal, and Cliffs Natural Resources (CLF), which gains from increased prices and shipments of iron ore.
Based on our views of the demand for all commodities, including agricultural commodities, over the next couple of years, we are also buying Penn Virginia Resources (PVR), Freeport McMoran (FCX), Southern Copper (SCCO) and Deere & Co (DE).
We continue to like the natural gas and liquids transporters such as Linn Energy (LINE), and Kinder Morgan Partners (KPM). In the REIT area, we are buying Anworth Mortgage (ANH) and Resource Capital (RSO). These investments pay a dividend of between 7% and 16%.
In other sectors of the economy, we’re attracted to Proctor & Gamble (PG), United Technology (UT) and Emerson Electric (EMR).
I believe we are entering a secular growth period for both hard and soft commodities. Developing economies are consuming large quantities of better food and materials for economic expansion. They seem to be steady in their growth, and my belief is that the U.S. economy will continue to expand at an annual rate of about 3%.
Ben Dickey CFP/MBA
